Does fostering affect a foster carer’s personal tax allowance?

The key test is your adjusted net income , rather than the total amount paid to you for fostering. Qualifying Care Relief (QCR) is applied when calculating the taxable profit from your fostering activity. If no taxable fostering profit remains after QCR, the fostering payments will not normally reduce your personal allowance. If taxable income remains, it is considered alongside your other income.

Your personal allowance is the amount of income you can usually receive each tax year before income tax is due. It is separate from the tax treatment of fostering payments. This means that receiving fostering allowances, fees or other payments does not by itself mean your personal allowance is removed.

However, your personal allowance can be reduced where your adjusted net income is above the relevant threshold set by HM Revenue and Customs (HMRC). The reduction is worked out using the tax rules for the year concerned and can eventually remove the allowance altogether. This is more likely to be relevant where you have several sources of income, such as:

• income from employment or self-employment;
• pension income;
• rental income;
• investment income; or
• taxable profit from fostering after QCR has been taken into account.

For many foster carers, QCR means the fostering activity produces little or no taxable profit. QCR is designed to recognise the costs of caring for a child in your household by deducting the applicable qualifying amount from fostering receipts. The calculation must still be made correctly, particularly where you care for more than one child, provide care for only part of a tax year or receive different types of fostering payment.

Where the calculation leaves a taxable profit, that profit is added to your other taxable income when considering your adjusted net income. The relevant figure is therefore not necessarily the amount shown on your fostering payment statements. It is the income that remains after the appropriate reliefs and allowable adjustments have been taken into account.

Some deductions can affect adjusted net income. For example, qualifying pension contributions and certain Gift Aid payments may be relevant, provided they meet the applicable tax rules. These calculations can be complicated if you have employment income, self-employment income or more than one fostering arrangement, so it is important not to assume that the full amount received is either taxable or exempt.

The effect on your tax position may be different from the effect on your personal allowance. Even if your personal allowance is unchanged, a taxable fostering profit could increase the amount of income on which you pay tax. Conversely, if your adjusted net income is high enough for the allowance to be tapered, the resulting tax may relate to your overall income rather than fostering payments alone.

If you foster jointly with another approved carer, each person’s tax position is considered separately. Income, reliefs and personal allowances cannot simply be combined without checking how the fostering arrangement is structured and how payments are allocated. A couple should keep clear records of who received the payments and how the QCR calculation applies to each person.

To work out whether fostering is affecting your personal allowance, you should:

• add together your taxable income from all sources;
• calculate the taxable result from fostering using QCR;
• include any relevant adjustments used to establish adjusted net income; and
• compare the resulting figure with the personal allowance rules for the tax year concerned.

Keep fostering payment statements, placement dates, records of children cared for, employment or pension records and evidence of relevant pension contributions or Gift Aid payments. HMRC rules and thresholds can change, so use the rules for the correct tax year. If the calculation is not straightforward, ask HMRC or a suitably qualified tax adviser to check whether your fostering income affects your personal allowance.